In a recent and significant turn of events, the Securities and Exchange Commission (SEC) and its staff have undertaken a slew of actions that mandate reevaluation of risk tolerance from registered investment advisers (RIAs) for relatively routine business practices. These include marketing, custody and other procedures traditionally associated with the role of RIAs.
August 21st was marked by a notable development. The SEC made its premier enforcement action against an RIA, Titan Global Capital Management USA LLC. Titan Global Capital Management USA LLC was found to be in violation of the Marketing Rule, Rule 206(4)-1 under the Investment Advisers Act of 1940 (the “Advisers Act”). As a result, major legal firms such as Morrison & Foerster LLP are now urging RIAs to reassess their risk management policies in light of the SEC’s recent actions.
The Enforcement Division of the SEC, in an effort to increase transparency in its examination program, has identified five key risk areas. The pivotal areas of focus surround the marketing rule, the Custody Rule, Environmental, Social, and Governance (ESG) issues, cybersecurity, and regulatory technology (RegTech).
- The examination program’s focus on the advancement of the SEC’s ‘marketing rule’ is designed to address the practices of investment advisers in advertising and solicitation.
- The ‘Custody Rule’, also known as Rule 206(4)-2, has undergone increased examination, assessing whether advisers are compliant with related rules and regulations to enhance the protection of client assets.
- ESG issues will be under heightened scrutiny, particularly for firms that advise clients on ESG-oriented investments. The advising companies will be expected to ensure consistency between their disclosures and practices.
- Cybersecurity has been identified as a crucial area to be addressed, surprisingly not for its technology-centered aspects, but for its implications for client protection. The implications of cybersecurity policies will therefore be examined thoroughly.
- Regulatory Technology or ‘RegTech’ will also be assessed under the program, with a focus on firms’ use of innovative and emergent technologies.
These areas of focus signify the SEC’s shift towards a more risk-based approach in its regulatory oversight. The aim is to enhance the processes that ensure client protection and accountability of investment advisers. All RIAs should take this opportunity to reassess their existing practices and ensure they are not only compliant with the existing rules, but also prepared for the changing landscape of SEC regulations and examinations going forward.